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This time a year ago we were absorbing the extraordinary fact that the Rockstar Bidco consortium – comprising Apple, Microsoft, Ericsson, RIM, Sony and EMC – had just emerged victorious from the Nortel patent auction, after seeing off Google and Intel with a jaw-dropping bid of $4.5 billion for the bankrupt Canadian company’s portfolio. It would be fair to say that the result of the auction, which was announced on 30th June 2011, did not just stun those in the IP bubble, but also grabbed the attention of boardrooms and investors across the world.
We have seen the results of that, and Google’s subsequent purchase of Motorola Mobility, roll out over the last 12 months. Other big deals have been done, some at the instigation of shareholders, while more have been mooted. What was once hidden has now comprehensively emerged as an asset class. As Ericsson’s chief IP officer Kasim Alfalahi said at the annual meeting of LES USA and Canada last October: there was BN (before Nortel); now we are in the AN age. And everything has changed. Indeed, Alfalahi himself can tell you by how much. In January he stopped reporting to Ericsson’s chief technology officer; instead his new line manager became the company’s president and CEO, Hans Vestberg. Ericsson, Vestberg had previously stated, is going to be doing a lot more patent monetisation in the future. A host of other companies have said similar things.
Alfalahi was in Portugal last week for the IP Business Congress. He took part in a plenary entitled The future of large IP acquisitions along with Ruud Peters of Philips, Brian Hinman of InterDigital, Paul Ryan of Acacia and David Descoteaux of Lazards, with Peter Holden of Coller Capital asking the questions. It was 90 minutes that confirmed we were right to hold the event under the banner of IP at the tipping point. Here are some of the key points that were made:
• According to David Descoteaux, who led the Lazard team that worked on the Nortel bankruptcy, the process was all about translating IP assets into cashflow. A big part of that was to work out the best way to do it; something which involved establishing whether a sale was a better option than creating a licensing business. The biggest challenge, he said, was to get some baseline valuations done. The input from experts, both from inside the Nortel IP team and from third parties, was crucial.
• Philips, said the company’s chief IP officer Ruud Peters, has a variety of strategies to acquire the IP it needs if it cannot develop it internally. It might think about in-licensing, or whole company purchases, or buying a specific portfolio. When it comes to purchases, Peters stated that all too often sellers are far too optimistic about the value of what they are offering. Those looking to do deals for patents that cover early-stage technologies frequently fail to understand the risks inherent in buying rights covering untested areas and the investments needed to move a technology from the labs into a product. When it does make a purchase, Peters said, Philips always self-finances – it has never used capital from an outside source.
• Brian Hinman, head of IP strategy at InterDigital, explained that the company’s recent deal with Intel concerned patents that were not key to its core licensing programme. He also stated that, contrary to frequent claims, there is no patent bubble. Instead, businesses are reacting to market conditions. Companies such as Google and Facebook, Hinman explained, have seen they have patent shortfalls and so have gone out and done something about it.
• Hinman also said that there was a continuing demand for strong patents, something that both Alfalahi and Paul Ryan, the CEO of Acacia, agreed with. Alfalahi divided portfolios being offered for sale into two groups: those which he described as anchor or foundational; and those which are peripheral. The former, he stated, will be worth ever-greater amounts. But, cautioned Ryan, the overall supply of patents in the marketplace will overwhelm demand. There is no question, he stated, that over the next five years there will be a significant increase in the number of assets for which monetisation solutions are sought.
• As for the types of patent that will be of interest moving forwards, Descoteaux identified a number of sectors. LTE would continue to be huge, he said, but people should also keep an eye on portfolios that cover digital advertising, social networking and mobile payments. Ryan stated that an area that is now attracting Acacia’s interest is medical technology. The firm has been active in the sector for about 18 months and sees considerable opportunities in it because of the potential to achieve high royalty rates. Acacia has put a team together to cover medtech and has already acquired a number of portfolios. Ryan also said that he believes there is potential in industrial patents.
• Amid all the optimistic talk about the burgeoning market, it was left to Descoteaux – the only non-IP person on the panel – to provide some perspective. While he had no doubt that IP had emerged as an asset class, and one that was now firmly on the radar screens of Wall Street investors and the C-suites of publicly- quoted companies, relative to the overall amount of M&A work that is done the IP transactions market is very small and will continue to be so.
That said, though, players like Lazard, Evercore and Barclays do now see IP as something worth getting involved with. And they, and the others that will follow them, have access to CEOs and CFOs in companies across the world – something that has long been seen as IP’s holy grail. What’s more, as Starboard and others have shown over the last year, shareholders are now paying attention to IP as well.
All of this means, as Descoteaux also said, it is now incumbent on management teams to have an angle on their companies’ IP positions; the subject cannot be ignored any more. When investment banks and shareholders ask questions, senior executives need to have answers. And the more they look at IP, the more they will see what it can do for them – with all the implications that has for strategic decision-making. This, in turn, will mean a much higher profile for corporate IP managers. As a number of IPBC delegates observed, they are going to have to learn to express themselves in the language of business much more effectively than they do at the moment.
Over and above this, what we can also expect during the coming years is for IP transactions to become more institutionalised. There will be greater liquidity and transparency, as well as better pre-acquisition discovery. What’s more, as IP moves into the mainstream, it is difficult to envisage CFOs and big investors tolerating a situation in which valuation remains so haphazard, with so many IP assets not appearing on the books. So we should probably look out for developments on that front too.
And, of course, right now when we say IP what we actually mean is patents. But perhaps that will not always be the case. As those who work in financial institutions learn more about the asset class and the other types of IP there are, who’s to say they will not start developing new ways to monetise these too? Someone may, for example, come up with a credible method to capture, bundle and package trade secrets and know-how in a way that will allow them to be transacted efficiently. Almost all IP monetisation of any kind – as well as most value creation generally – is predicated on quality. This may well be the one lesson that managements learn most quickly.
To my mind, though, one thing is absolutely certain. The IP market is not going to go away now. People are not suddenly going to decide that actually IP is not important after all; they can’t do that, because it is. With their close association with the likes of innovation, content and brands IP rights and related assets underpin the 21st century economy and the businesses that operate within it. Over the last year, investors, shareholders and publicly-quoted company boards have begun to understand that. Further down the line, this will feed through to the business schools, which will always make sure they teach what is happening in the world their fee-paying students want to work in. And, in time, the message will filter down to smaller entities too.
Certainly, there is still a long way for investors, shareholders and boardrooms to travel – and they are going to need a lot of help and advice along the road – but last week at the IPBC I was finally convinced that it is a journey from which there is no coming back. We’ve all been waiting a long time for this to happen. And now it has. As we begin Year 2 AN, let’s make sure we do not mess this once in a lifetime opportunity up.
IP management, Licensing, Brands, IP litigation, Copyright, Patents, IP business, IP finance, IP valuation
I agree with you that an ongoing theme of the entire IPBC meeting was that IP monetization is now attracting greater attention by investors and the C-suite. I would also remind everyone that we have been down this road before -- specifically with copyrights in the form of securitization of music rights. So while the IPBC talks patents, there are other IP and intangibles in play as well. For example, customer/mailing lists are routinely monetized (sold, leased & used as collateral). Key will be to learn the lessons of the past -- including the failed lessons of other asset classes. Strong assets make strong investments. It will be up to the industry to convince investors that they are buying a piece of Rockefeller Center not Florida swampland. I'm not sure that case has yet been made.
KenKenan Jarboe, Athena Alliance on 06 Jul 2012 @ 15:46
Ken, The problem is not quite as you state.
Patents have a unique property in the IP world as illustrated by the link above. One day you actually own a Rockefeller Centre the next day you don't even have Florida swampland. and not even the IP experts can predict this. Makes sub-prime mortgage derivatives look like a good bet.
The idea that Patents can ever be a stand alone asset class is laughable. We need to take a lead from the voice of reason....... Mr Descoteaux....the IP (read Patents) transactions market is very small and will continue to be so. These big ticket patent transactions are largely driven by a very narrow US business sector view of IP and are just a very small part of the world of patents and IP. The once in a lifetime opportunity is to accept that and to realise that IP could now just possibly become mainstream.Nicholas White, Tangible IP on 06 Jul 2012 @ 22:23
Nick - I agree to a large extent. The story is not the creaiton of an asset class, the story is that for the first time ever serious investors and big company C-suites are looking at IP. It is the consequences of this that are so exciting. If the IP world has anything about it at all, this is the moment it has been waiting for.
It is also true that were it not for the US litigation system, we probably would not have seen the deals we have done. But that system does exist and does not look lilely to change much. Thus, the same scenario is likely to play out again and again, just as it has done many times in the past: patent battles in emerging - and lucrative - areas of technology. That will always provide opportunities for sellers and for banks such as Lazards, Evercore and Barclays. Indeed, there may well be a case for saying that these will escalate in future as many companies will not build patent portfolios from the off, but will instead seek to acquire them only once they become successful.
Indeed, let's go further. Perhaps the thing that Europe needs in order to take IP more seriously is US-style litigaiton. The NPEs, the buying and the selling, the M&As and so on have concentrated US and Asian minds wonderfully. Maybe we need the same!Joff Wild, IAM Magazine on 08 Jul 2012 @ 11:45
Joff & Nick,
I would be the first one to make the argument that IP is all about using the intangible asset to make a product, not simply monetizing it externally (or using it as a defensive strategy). But the whole reason why investors are now looking at IP is because they see the potential as an asset class. If IP ends up viewed by investors and the C-Suite as being as toxic as sub-prime mortgage backed derivatives, then IP will never become "mainstream."
KenKenan Jarboe, Athena Alliance on 08 Jul 2012 @ 18:21
Could not agree more Ken. But the good thing about IP, though, is that it is a whole lot more than something to bundle and monetise. Along with other IAs, it underpins so much of what drives businesses forward and gives them competitive advantage. My belief is that now investor and boardroom focus is on IP there is a unique opportunity to drive that message home.Joff Wild, IAM Magazine on 08 Jul 2012 @ 18:32
I really think we need to get this in perspective. The C-suite of every major company “got” the right approach to IP decades ago. Having worked actively in IP for 20 years I just don’t recognise this apparent Cinderella syndrome. It’s not rocket science. There is nothing fundamentally new in terms of c-suite perspectives occurring now or actually needed. We are seeing a little bit of a peak in a certain form of transaction and in the main that is a good thing. It raises awareness of IP (not in the top company C-suites) but in the really important innovative parts of the economy. Sadly, all the twaddle that is being espoused in the press about this (fuelled by the IP community in part) is damaging not enhancing the position. Look at the last FT piece by a UK Nobel Prize winner about how the IP system is not for SMEs. The wave of enthusiasm you may seek for engaging with IP is seriously undermined by the rubbish reported in this area. It just reinforces prejudices and creates new ones. The politicians are now getting more and more interested in IP for the wrong reasons.
A small part of the IP Community, mainly US, is just too focused on this fluff at the top, the big deals, the money for paper view of the world, to the exclusion of all else. We have gone IP monetisation mad as a fast buck, blinded by all this glitter in the circus around a seminal event, namely the digital shake out and the very negative impacts of the US legal system that rewards lawyers and not inventors. I think some sections of the IP community have lost impartiality on this important economic issue and that is because as ever there are serious conflicts of interest. Many IP pundits are just talking up this patent hysteria for short term financial gain. As long as the cow is producing milk then milk it.
What is fundamentally important is the monetization of ideas, inventions and innovation. Divorcing IP from that into some kind of independent stand alone monetizable asset....that has primacy..... is not just illogical but is also seriously undermining the whole innovation process. I will say here that the Trolls, whilst a nuisance for some, are not the fundamental problem. The problem is the growing number of people who are turning away from investing in early stage R&D and innovation. Why bother? Only schmucks do that. I'll wait until it's successful and then use capital to monetise the IP to the highest bidder.
If ever there was a need for focus it is now. A focus away from this high profile fluff and back onto the real world of IP.
The US patent and litigation system is now seen as the problem not the solution for improving innovation in the US economy. The last thing we need is a repetition of that in Europe and we need to see major reforms in the US. What we do need to see generally is a move back to the basic fundamentals of patents for example. Their primary function is to enhance not diminish innovation to support investment in research and provide rewards for that investment not to make money for smart intermediaries.
In the past six months I have been approached by two investors with interests in large patent portfolio investment. They used to invest in start-ups. Why the change? Less risk bigger potential gains. It’s a no brainer. Investing in invention is for schmucks. They are wrong but accurate.Nicholas White, Tangible IP on 09 Jul 2012 @ 14:14